Office for NFP Sector Engagement.
Credence goods and services generate information asymmetries that can be exploited through fraud, mismanagement, or mission creep. So, the question is how to determine whether nonprofits spend their monies efficiently and as promised.
Three Cups of Tea describes the transition of Greg Mortenson from a registered nurse and mountain climber to a humanitarian committed to reducing poverty and promoting the education of girls in Afghanistan and Pakistan. Mortenson became a co-founder of the Central Asia Institute, a nonprofit organization that claimed to have built 171 schools and providing education to over 64,000 children, primarily girls, in remote regions of Afghanistan and Pakistan. In April 2011, CBS News broadcast its 60 Minutes program in which it reported alleged inaccuracies in the book, and its sequel, Stones into Schools: Promoting Peace with Books, Not Bombs, in Afghanistan and Pakistan, and financial improprieties in the funding and operation of the Central Asia Institute. It appears that many of the stories in these books were false, and that Mortenson was personally enriched by the sales of the books and monies received by the charity, notwithstanding its status as a tax exempt organization in the US and its high rating by an independent charity organization.
As a result of the Scoping Study, or consultation paper in January 2011, the Government in May 2011 proposed a Not-For-Profit Sector Reform Council to establish a new regulatory system. Essentially, Australia seems to be heading toward a regulatory system that is primarily responsible for registration of charities eligible for tax exempt status and other conditions. The question is whether such a system is sufficient, or good enough, or whether there are alternatives, such as reputation, self-regulation, accreditation, certification, that should be considered.
Regulation which is largely based upon and limited to registration is widely required by law around the world, whether or not there are tax considerations applied to the NFP organization or donor. The focus is primarily on compliance with the tax laws with respect to public benefit and compliance with certain minimal requirements. Such a regulatory system is foundational, but not sufficient, quoting van Broekhoven and Kemps, 2011. OSCE Electronic Journal,
We have seen no evidence that a regulatory system imposed by the government instead of regulatory schemes imposed by independent watchdogs increased transparency and accountability of the NGO, and if it did, that it increased the level of trust between donor and NGO thereby increasing the level of giving.Furthermore, the Australian registration system tends to be too complex and lack coherence. Compliance and reporting requirements impose significant costs; the trend has been for a growing compliance burden; the compliance burden is disproportionate to the risks involved and funds received; reporting requirements often appear to serve no worthwhile purpose; and lack of consistency and duplication add to the compliance burden. The US Internal Revenue Service system is based on self-reporting with insufficiently based verification. For example, just this year, the IRS revoked the tax exempt status of 20 percent of registered tax exempt organizations. For the most part, these revocations were the result of charity organizations failing to file their informational tax return for three consecutive years.
Will a "national one-stop-shop regulator" or registrar take care of the problem of bureaucratic red tape? Probably not because it will be based on self-reported, insufficiently verified data. See presentation of Dr. Lana Friesen.
To solve the credibility problem, a sufficient condition must include an assessment of membership and responsibility of governing board, fulfillment of public benefit goals, fiscal control and management, fundraising practices, and provision to public of information, such as disclosure of audited financial statements. A form of self-regulation by observation, and perhaps by third party, is rarely truly independent. Again, quoting from van Broekhoven and Kemp, Ortmann pointed out that:
Important to the satisfaction of these standards is the goal of ensuring that the public, donors and recipients of public benefits, have ready access to sufficient and adequate information to enable them to make informed decisions about the organization, their relationship to the organization, and the accountability of funds raised by the organization. Standards, without monitoring, provide little assurance to the donor regarding the transparency, integrity, and governance of charities and other public benefit non-governmental entities.
Certification schemes did not exist in the US until quite recently, except in the case of ECFA. Now, BBB Wise Giving Alliance, and Maryland Association of Nonprofits, which is replicated in a number of states, are models of certification. The ICFO members, including CBF, DZI, ZEWO, ECFA, CCCC, and Taiwan NPO Self-Regulation Alliance are examples of how certification models can be effective. It is interesting that the ICFO members display: widely divergent organizational solutions; widely divergent investigative practices; widely divergent pricing strategies; widely divergent methods of financing; and widely divergent successes.
What we ought or need to know is the extent to which fraud and mismanagement exist in the third sector. According to the NCVO "Managing Risk" report of 2011,
There is a perception that the charitable sector's altruistic nature makes it a "soft target" for fraudsters. In reality most of what is known comes from anecdotal evidence. ... Over the past couple of years a number of surveys have tried to fill in this knowledge gap ... .
[T]he most recent assessment of fraud loss in the charitable sector, which is provided by, the National Fraud Authority's "Annual Fraud Indicator" estimates that total lost turnover for the sector is around ₤ 1.3 billion a year. ... an average of 2.4% of charities annual turnover. ... The estimated ₤ 1.3 billion figure captures fraud against charities (for example fraud perpetrated by employees and/or volunteers, or fraudulent applications for grants and/or financial support) as well as some of the financial impact that fake or sham charities have on legitimate charities.Other statistics seem to suggest that there is less fraud in recent times than previously. However, the problem with these kinds of survey-based statistics is that it is quite likely that there is a high incidence of unreported cases, and it is difficult to figure out what is fraud vs. mismanagement vs. mission drift.
According to Ortmann, there is a lot of interesting work to be done by researchers, including theoretically, empirically, and experientially. For both policy makers and advocates for the third sector, insights can be gained by looking at what is being done elsewhere, and through the cross fertilization of ideas, practices, and successes and failures. This is one of the strengths of ICFO and its national member organizations.
“Credence” goods, on the other hand, are those which the buyer does not know either before or after purchase. As a result, an expert knows what is needed before the purchase, and whether it will satisfy the needs of the purchaser or stakeholder. Examples include medical doctors who perform the diagnosis, prescribe the treatment, and perform the services; or mechanics who tell the automobile owner what is needed for the repair of the automobile and provides the service.
An examination of eight inquiries into patient safety identified a number of common themes. First, some health care was far below quality. Second, quality monitoring processes were deficient. Third, individual health care providers and patients raised concerns. Fourth, critics were often ignored or abused. Fifth, teamwork was deficient. Sixth, patients and families were not informed members of the team. All of this pointed to risks in accepting individual self-assessments.
Many charities are an invisible part of the economy. The Charities Commission in New Zealand servers three major functions: education, registration, and monitoring compliance and investigating claims of noncompliance. To be more specific, its functions include: promoting public trust and confidence in the charity sector, encouraging and promoting the effective use of charitable resources, educating and assisting charities in relation to matters of good governance and management, considering and deciding on applications for registration as a charitable entity, compiling and maintaining a registry of charitable entities, monitoring charities to ensure that they remain qualified for registration, and inquiring into charities that may be involved in serious wrongdoing.
Except with respect to certain tax related information, there is little accountability, if any, required of the organization not submitting itself to accountability and monitoring, which represents the vast majority of NPOs.
As Michael Novak observed during his opening remarks at the opening dinner of the Summer University of Aix en Provence, in August 2005,
We can be pretty confident that Tocqueville would have been quite worried, however, about a new method employed by the state (or if not the state, at least the elites who make it their chief interest to enlarge the state) to turn civic associations into instruments of the State. These new organs are typically called Non-governmental Organizations, NGOs, and many of them are genuine associations, which allow citizens to govern aspects of their own lives cooperatively without turning to the state. But many of them are no more than lobbying organizations, founded and financed to build constituencies for enlarging government activities and government bureaucracies.And so, quoting from Democracy in America, as I did during my presentation, it seems that these thoughts of Alexis de Tocqueville, sum up pretty well what the conference was all about.
When I think about the petty passions of the men of our times, about the softness of their mores, about the extent of their enlightenment, about the purity of their religion, about the mildness of their morality, about their painstaking and steady habits, about the restraint that they nearly all maintain in vice and virtue, I am not afraid that they will find in their leaders tyrants, but rather tutors.
. . . .
I would like to imagine with what new traits despotism could be produced in the world. I see an innumerable multitude of men, alike and equal, who turn about without repose in order to procure for themselves petty and vulgar pleasures with which they fill their souls. Each of them, withdrawn apart, is a virtual stranger, unaware of the fate of the others: his children and his particular friends form for him the entirety of the human race; as for his fellow citizens, he is beside them but he sees them not; he touches them and senses them not; he exists only in himself and for himself alone, and, if he still has a family, one could say at least that he no longer has a fatherland.
Over these is elevated an immense, tutelary power, which takes sole charge of assuring their enjoyment and of watching over their fate. It is absolute, attentive to detail, regular, provident, and gentle. It would resemble the paternal power if, like that power, it had as its object to prepare men for manhood, but it seeks, to the contrary, to keep them irrevocably fixed in childhood; it loves the fact that the citizens enjoy themselves provided that they dream solely of their own enjoyment. It works willingly for their happiness, but it wishes to be the only agent and the sole arbiter of that happiness. It provides for their security, foresees and supplies their needs, guides them in the principal affairs, directs their industry, regulates their testaments, divides their inheritances. Can it not relieve them entirely of the trouble of thinking and of the effort associated with living?
In this fashion, every day, it renders the employment of free will less useful and more rare; it confines the action of the will within a smaller space, and bit by bit it steals from each citizen the use of that which is his own. Equality has prepared men for all of these things: it has disposed them to put up with them and often even to regard them as a benefit.
After having taken each individual in this fashion by turns into its powerful hands, and after having kneaded him in accord with its desires, the sovereign extends its arms about the society as a whole; it covers its surface with a network of petty regulations—complicated, minute, and uniform—through which even the most original minds and the most vigorous souls know not how to make their way past the crowd and emerge into the light of day. It does not break wills; it softens them, bends them, and directs them; rarely does it force one to act, but it constantly opposes itself to one’s acting on one’s own; it does not destroy; it prevents things from being born; it does not tyrannize, it gets in the way, it curtails, it enervates, it extinguishes, it stupefies, and finally it reduces each nation to nothing more than a herd of timid and industrious animals, of which the government is the shepherd.
"Give out of love" your Word commands;
We are your head, your heart, your hands.
Your Word you underscore with needs
By using us to answer needs.
Oh what a joy to give, and then out of compassion give again.You have no needs -- though that is trueThe gifts we share are given to you.
* This blog post represents my interpretation of the presentations made in Sydney, Australia at the Research & Policy Conference, Regulation for Not-For-Profit Sector in the 21st Century, sponsored by the University of New South Wales, Centre for Social Impact. The views are mine and mine alone, and are not intended to convey any positions, intended or not intended, by the University, the Centre, the hosts convening the Research Symposium and Research & Policy Conference, or the presenters. Nevertheless, it was an honor to be invited and to represent the International Committee on Fundraising Organizations (ICFO).